Corporate Offshore Tax Dodging and How to Stop It

JUNE 2013

U.S. PUBLIC INTEREST RESEARCH GROUP (U.S. PIRG)

AMERICANS FOR TAX FAIRNESS

What’s at stake?

• Ability to fund a government that makes critical investments in future generations and takes care of those most in need

• $150 billion in revenue lost each year to tax havens that could:• Replace across-the-board spending cuts known as the “sequester” • Avoid cost of living cut to Social Security• Pay for Pell grants for 10 million college students

• Tax system corporations want is a race to the bottom• Shipping profits and jobs overseas• Lowering wages here at home

2

Corporate profits at record highs, Corporate taxes at record lows

1952

1954

1956

1958

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

0

2

4

6

8

10

12

5.8%

9.8%

5.5%

2.5%

Corporate Taxes and Profits as a Share of U.S. Economy, 1952-2011

Corporate Profits

Year

Perc

ent o

f GD

P

Source: Federal Reserve Economic Data

3

People paying more, corporations paying less

1952

1954

1956

1958

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

0

10

20

30

40

50

60

42.2%46.2%

32.1%

9.9%

Corporate and Individual Income Tax as Share of Federal Revenue, 1952-2012

Individual Corporate

Year

Perc

ent o

f Rev

enue

Source: U.S. Office of Management and Budget

4

Corporate tax revenues have shrunk a lot

1952

1954

1956

1958

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

0

10

20

30

40

50

60

70

80

90

100

Percent of Individual, Corporate and Payroll Taxes as a Share of Federal Receipts, 1952-2012

Year

Perc

ent o

f Rec

eipt

s

Individual

Corporate

Payroll

Source: U.S. Office of Management and Budget

5

U.S. corporate taxes in middle of world pack (all govt. levels)

Iceland US Italy UK Can Korea Norway0

2

4

6

8

10

12

1.0

2.7 2.8 3.1 3.3 3.5

10.0

OECD Corporate Tax Revenue as Share of Economy, 2010

OECD Countries

Rev

enue

Per

cent

age

Source OECD.StatsExtract

6

What federal income tax rate do corporations actually pay?

Statutory rate: 35% (rate companies supposed to pay)

Effective rates (actually paid):• All companies: 12.1% in 2011 (Congressional Budget Office)

• Fortune 500 companies: 18.5% in 2008-2010 (Citizens for Tax Justice)

7

What happened? Tax havens cost U.S. taxpayers $150 billion a year

Ugland House, Cayman IslandsAddress of 18,857 corporate entities

8

How U.S. corporations are taxed

“Worldwide” system of taxation• U.S. corporate income tax assessed on all profits everywhere

• MINUS taxes paid to foreign countries

But…companies can defer paying taxes on offshore profits until returned to America• Creates powerful incentives to disguise U.S. profits as “foreign”

profits earned in tax havens with no or with low tax rates

9

10

Apple Inc: how tax dodging works• $74 billion profits earned offshore (2009-2012); virtually untaxed

using Irish subsidiaries

• One Irish subsidiary: Not taxed by U.S. or Ireland. U.S. recognizes where incorporated (Ireland); Ireland recognizes who controls (U.S.)

• Second Irish company: Negotiated a tax rate of less than 2%. Apple transfers part ownership of its intellectual property created in U.S. to company allowing Apple to shift profits to Ireland.

• U.S.: Has 95% of R&D; 65% of employees; 35% of profits; controls Irish subsidiaries

• Ireland: Has 1% of R&D; 3% of employees; claims 65% of profits

• Effective U.S. tax rate: 7.3% counting untaxed offshore profits (2011)Source: U.S. Senate Permanent Subcommittee on Investigations

11

Corporate offshore tax avoidance has grown a lot• $1.9 trillion in U.S. profits sitting offshore avoiding U.S.

taxes

• Increased 70% over last five years

• 83 of top 100 publicly traded companies have subsidiaries in offshore tax havens

• 43% of foreign earnings by U.S. multinationals booked to 5 tax-haven countries

12

Corporations want to make the system even more unfair

• Temporary tax amnesty: Repatriation tax holiday

• Permanent tax amnesty: Territorial tax system

13

“Repatriation” tax holiday: temporary tax amnesty• 2004 tax holiday given to return offshore profits• Corporate tax rate dropped to 5% -- down from 35% or a

company’s effective tax rate• $312 billion brought back to U.S. – half by 15 companies• Most money came back from low-tax countries or tax havens• No new jobs or investment created – mostly went to stock

repurchases and higher dividend payments

• $1.9 trillion offshore now waiting for new holiday

14

Territorial tax system: permanent tax amnesty • Eliminates all U.S. taxation of corporate overseas income

• Creates greater incentivizes to shift profits to tax havens

• Benefits few companies in a few industries: high tech, pharma, banking

• Main Street and domestic businesses and individuals have to make up for lost revenue

• Encourages job loss and lower wages

• Higher budget deficits: $130 billion over ten years

15

Our solutions: End offshore tax dodging

• Sen. Sanders bill, S. 250/Rep. Schakowsky, HR 694• Ends “deferral” – ability of companies to delay paying taxes on

profits offshore until returned to U.S.• Raises $600 billion over 10 years; 60% of the across-the-board

spending cuts (“sequester”)

• Levin bill, S. 268• Closes worst offshore loopholes allowing companies to shift profits

overseas• Raises $150-200 billion over 10 years

16

A winnable fight

• Public strongly with us• By 73%-25%: Voters approved of closing loopholes allowing

corporations and wealthy individuals to avoid paying U.S. taxes by shifting income to overseas tax havens

• By 73%-20%: Voters opposed allowing corporations to not pay any U.S. taxes on profits that they earn in foreign countries – essentially rejecting the basis of a “territorial tax” system

• Powerful and diverse constituencies on our side

• Front page issue

Source: Hart Research Associates, Jan. 2013

17